Merrill Lynch Investment Management will increase its allocation to high-beta credits by 10% in its $8.2 billion primarily investment-grade portfolio if spreads widen an additional 10 basis points, said John Burger, portfolio manager in Plainsboro, N.J. "If we get another 10bp of widening between LBO risk, the autos, or more pain in the hedge fund community, we'll increase our weighting," he said, noting he expects spreads to indeed widen.
MLIM will look to add lower quality triple-Bs and specifically telecom and auto names. Burger said telecom valuations are attractive and risks have subsided given the sector has already gone through shareholder and M&A enhancement. With regard to autos, the manager said fundamentals remain negative, but uncertainty surrounding the rating agencies and index inclusions are receding. He declined to highlight specific credits.
Burger's beta is currently around one and neutral against his index, the Lehman Brothers Credit Index. Despite his view spreads will widen marginally further, he said it is too late to pare back on individual names. "Given at the moment we expect only another 10bp of widening, there's nothing left to do on individual names, but you can play the CDX and high-vol. indices," he explained. MLIM has a modest overweight to triple-Bs relative to its double- and triple-A weightings. The manager declined to quantify his weightings.
MLIM has a major overweight in utilities because the sector has minimal LBO and shareholder event-risk. "Utilities still have a credit trend that is stable to improving, unlike the rest of the corporate universe which is stable to declining," added Burger. MLIM is underweight consumer products, brokerage and retail. The manager is fully invested with less than half a percent in cash and its duration is neutral.
